WASHINGTON (2/7/13)--Forging a sustainable housing finance system will be a House Financial Services Committee priority going forward, committee chairman Jeb Hensarling (R-Texas) said during a Wednesday hearing on the state of the Federal Housing Administration (FHA).
"Hardworking Americans demand a healthy economy, and we cannot have a healthy economy until we have a housing finance system that is both sustainable and competitive," Hensarling said.
The FHA's single-family insurance fund is facing a projected shortfall of $16.3 billion due to mortgage loan defaults by borrowers, and Hensarling and others have called for serious reforms to the agency.
In his opening hearing statement, Hensarling noted that the FHA controls 56% of the total mortgage insurance market. "Instead of complimenting a robust private mortgage market, the FHA's high cost loan limits and extremely low down payment requirements put it in direct competition with the private sector," he added.
Witness Anthony Sanders of the Mercatus Center at George Mason University said the FHA's current policies encourage risk taking by low-income households that should not be buying properties.
Increasing the FHA's FICO score floor to 660, imposing a minimum down payment requirement of 5%, lowering loan limits to $625,000 and eventually to $350,000, or less, and reducing government loan insurance to 80% of the total loan amount would "reduce the FHA's substantial, high-risk footprint in the mortgage market," he said.
Center for American Progress Housing Finance and Policy Director Julia Gordon, however, noted that the FHA's risk profile is improving. FHA loans taken on since 2010 are performing well, she said. Gordon acknowledged that the FHA's share of the mortgage market "should and will return to its historical norms," and suggested that the FHA could improve its risk estimate and loss mitigation efforts. She also cautioned against quickly reforming the agency. "To the extent we move, we need to move very slowly and very carefully," she said.
The FHA late last month announced it would increase some premiums and alter some underwriting requirements in a bid to improve its financial condition, manage and protect its single-family insurance programs and encourage the return of private capital to the housing market.
Wednesday's hearing was the first in a series of hearings that will be held throughout the year. FHA Commissioner Carol Galante will testify before the committee on Feb. 13, and more hearings will be held at the full committee and subcommittee levels.
For more on the Wednesday hearing, use the resource link.